Value of Perfect Information

DO chart with unfilled volume gap (at 51.89) , moving averages & fibs.

1. The International Monetary Fund could offer Italy between EUR400 billion and EUR600 billion in financial support to give Italian Prime Minister Mario Monti a window of 12 to 18 months to enact reforms sufficient to restore waning market confidence in Italy’s ability to repay its debt, Turin daily La Stampa reported Sunday, citing IMF sources.

2. German Chancellor Angela Merkel and French President Nicolas Sarkozy are planning more drastic means – including a quick new Stability Pact – to fight the euro zone sovereign debt crisis…..Euro-zone countries are weighing a new plan to accelerate the integration of their fiscal policies, people familiar with the matter said, as Europe’s leaders race to convince investors they can resolve the region’s debt crisis and keep the currency area from fracturing

3. The European Financial Stability Facility may insure bonds of troubled countries with guarantees of between 20 percent and 30 percent of each issue to be determined in light of market circumstances. The proposal to attach guarantees of up to 30 percent of future EFSF bond issuances’ worth may create a threefold expansion of the 440 billion-euro ($583 billion) fund.

Runner-up! Black Friday retail sales up 7%

Update 7:30 p.m. EST.

The good news continues…

The biggest bond dealers in the U.S. say the Federal Reserve is poised to start a new round of stimulus, injecting more money into the economy by purchasing mortgage securities instead of Treasuries. Fed Chairman Ben S. Bernanke and his fellow policy makers, who bought $2.3 trillion of Treasury and mortgage-related bonds between 2008 and June, will start another program next quarter, 16 of the 21 primary dealers of U.S. government securities that trade with the central bank said in a Bloomberg News survey last week. The Fed may buy about $545 billion in home-loan debt, based on the median of the 10 firms that provided estimates.

Follow Euro trading here:

http://www.sgxniftydowfutureslive.com/index_files/DOWFUTURES.htm

http://www.forex-markets.com/quotes.htm

http://www.kitco.com/ Scroll to bottom for exchange rate.

http://www.xe.com/

To see how FTSE will open go here:

http://www.igindex.co.uk/

or here:

http://www.financialspreads.com/public/

A clandestine meeting at an inaccessible schloss just west of the Austrian border.  We take you now to  a storied hall deep within:  SPECTRE was there, that fabled organization bent on world domination, as were several Bilderbergers and, a couple of gentlemen whose politics lean slightly to the right of the Reichstags of old.  Plans for the complete renovation of Europe were beginning to come to fruition.

“We must quicken the pace now that the tipping point has been achieved.”  Instructed one slightly nasal voice, a man who was known to speak in sharply appointed tones.  And rightly so fore he was known simply in these circles as First Speaker.

“Greece has fallen time to move up the timetable on Italy!”

There were quizzical looks  -furtive glances between some of the junior members.

 ”Wasn’t Spain to be the next target?”, one pipsqueak voice piped.  Its owner, from across the sea was not versed in the subtles of intra-European affairs.  The penchant for revenge.  The enormous capacity for enmity; the zeal with which the payback for ancient treachery was eagerly awaited.  This was not business, it was personal! 

The first Speaker pounced, “Spain was never a problem.  With 46% of their youth unemployed and over 30% of adult workers on part-time assignments, we already have a teeming populace; bent and broken-willed by the housing collapse and the on-going recession.  At any time we can turn them.  Mold them to our purpose.

Now is the time to strike at the soft under-belly, let the French know that they are next!  Let them know that:  WE ARE COMING!!”  The first speaker stopped short, his ringing proclamation echoed around the massive stone structure, dying in the distance.

“What is it that you propose?” , a slightly nervous middle-aged female asked tenatively.

“We bring in the hook.”, came the sharp reply.   “The final hammer blow.”

The woman quivered.  “You mean, we have achieved?”

“Yes Contagion!”, triumphant shout.

“Do you mean to say…”  A tall, much too pale, gnomish figure began to venture before being abruptly silenced by the architect of this diabolically clever scheme.  The First Speaker continued on the plan of his creation… “Yes, we will now have the bond guys up the ante on Italy.  The interest rate on Italian bonds will soar past 8% and the government will collapse, leaving their economy open wide for our attack.”

“What if Berlusconi steps down and appoints a unification government?”, ventured another senior member of the cabal.

“That won’t happen.”  The First Speaker assured knowingly.  “No transitional or unity government.  Just a three month power vacuum followed by general elections.  This is a recipe for chaos!”  He smiled, then concluded.  “He was the only thing holding the place together.  You know they’ve had sixty governmnets since World war II.  No one ever lasts five years.  The whole show will fall.”  [AND ALL THE MARKETS WITH IT!  ED.]

“Well that sounds like a plan.”, offered a heretofore quiescent voice from the shadows.  Now to fund my re-election campaign.  Everybody got their shorts in place?”  A general nodding of agreement from the amorphous grouping.

“Good then 2012 looks like it will be our year.  As the recession cascades around the world it will be time for a New Europe to rise from the ashes of the Common Market decoupling.

“TO A NEW EUROPE”  SOUND OF GLASSES CLINKING TO THE COLLECTIVE TOAST.

 It seems someone has been reading my posts and taken my prognostications one step further:  current head of the IMF said today: [ Courtesy Reuters ]

Christine Lagarde, head of the International Monetary Fund, told a financial forum in Beijing that Europe’s debt crisis risked plunging the global economy into a Japan-style “lost decade.”

“Our sense is that if we do not act boldly and if we do not act together, the economy around the world runs the risk of downward spiral of uncertainty, financial instability and potential collapse of global demand … we could run the risk of what some commentators are already calling the lost decade.”

 My prediction [ 11 /1/11 ]“If the EFSF and bank bailout funds are insufficient in the markets’ opinion, first target will be the European insurance companies, holders of these bonds!  And thus the game begins again”. This is not the recipe for bringing Europe out of recession. This sufficiently adequate backstop and continued pressure for evermore austerity will consign Europe to slow growth at the core, at best, for the foreseeable future. [ I was attempting tact].

The falling U.S. Dollar … is it a good or bad event?

A dropping Dollar is considered an advantage for U.S. firms that trade internationally.

But, could a falling Dollar turn into a U.S. confidence crisis?

The answer is Yes.   While a falling Dollar is good for U.S. exports, there is a point where a good thing could turn ugly.

Take a quick look at today’s Dollar chart and  you will see where that point is.

Where we are now …

Note that the Dollar is now below its 74.21 support level … and there are no more supports until it gets down to 71.31.   So now, the Dollar should continue to fall and that will be good for our stock market and for exports.

However, as the Dollar starts to approach the 71.31 level, glee will turn to worry as investors start to wonder if the Dollar and can make a double bottom (at 71.31)  … or if it will plunge below that support and go into free fall.

It is very hard for anyone to imagine the Dollar not holding that double bottom, but if Congress doesn’t wake up soon, stop trying to satisfy lobbyist, and start making decisions for its citizens and economy, then the Dollar will judge them harshly.

USDX Chart courtesy of www.StockTiming.com

Part if not all of the goal of quantitative easing is to force China’s hand at revaluing the RMB, thus making US exports more competitive and bringing jobs back home.  China has refused to revalue and as a result has faced growing inflation at home.  Bernanke has even hinted at times that if countries do not like the results of “our” monetary policy they should adjust “their” currency.  That’s about as direct a central banker can be without writing down a country’s monetary policy for them.

The choices for China are rather difficult.  Inflation, especially in the face of the global unrest that has developed recently threatens instability within their country.  Rice has now started to move up in price as well adding further pressure.  Tiananmen Square was partly a result of inflation concerns and the last thing China wants as they try to become a more dominant player in the world are pictures of tanks rolling in the street at protesters.

Should China decide to raise the value of the RMB they can fight inflation, to some extent but they risk losing jobs.  Is there much of a difference between higher inflation with a job or lower inflation without a job?  Additionally China is trying to slow down its own economy to manage what many see as a bubble in asset prices.  Chinese Premier Wen Jiabao seems somewhat concerned with the precarious situation China finds itself in a recent speech (from Reuters).

“Rapid price rises have affected the public and even social stability,” Wen said.

Wen said maintaining social stability was also central to the country’s foreign exchange policy, requiring a step-by-step increase in yuan flexibility so that Chinese businesses could adapt to the changes.

“If the yuan saw a one-off large appreciation, that would cause many closures of our processing enterprises and make many export orders shift to other countries and many of our workers will lose jobs.”

“Let them think about that: if businesses go bankrupt, workers become unemployed and rural migrant workers go home, then what do we have to expand domestic consumption, where will increased consumption come from?”

“I have in fact said before that if price rises become linked to the problems of graft and corruption, that will be enough to spark public discontent, and even create serious social problems,” Wen said.

Some mixed messages come out of this week’s CFTC Commitment of Traders Report. Below are six charts with my best estimate of what the data is telling us. The three key takeaways are

• Commercial traders appear positioned for further bond weakness

• Commercial traders are reducing net short positions implying copper weakness

• Retail traders are positioned for further USD weakness, implying USD strength

Bonds

Looking purely at the relationship to 30 year yield and the SPX, this chart implies that further bond weakness (lower price higher yield) would be a positive for the SPX. This cannot be taken purely at face value though. There are many implications to a weakening bond market beyond this chart. Still, the data below would imply continued equity strength.

Bonds – Commercial Net

Commercial positions continue to move towards a more net long in the face of 30 year weakness.  At face value this chart would imply further bond weakness to come.  It’s important to note though that commercial positions are approaching a 52 week high.

USD – Commercial Net

This is a tough one to read.  The commercial trader position is net long and matches that of the prior 52 week high.  It is very possible their net long position grows but considering this position relative to the prior 52 weeks, it is quite possible they begin getting more short which would imply USD strength.  The USD has bounced off key support which would further argue for a reversal to a more short commercial net position.

USD – Commercial VS Retail Net

This next chart is that of the non reporting positions versus commercial positions.  Non reporting (retail) are relatively short versus prior times in the year so there is fuel for a short squeeze in the USD.  Hard to make any definitive call though.

Copper – Commercial Net

This is a rather interesting chart.  Copper caught a nice bid the past week yet the commercial traders are not buying it (literally).  They appear to be getting more net long (this  chart is inverted for comparison sake) which would imply pending copper weakness.

Copper – SPX VS Commercial

Nothing too definitive can be drawn here other than a word of caution for the SPX as commercial positions appear to becoming more net long (chart is inverted for comparison sake).

The USD cannot catch a bid. No one seems to want it these days. Below is a three year weekly chart of the DXY which has traded nicely within a narrowing range. When QE2 was announced at Jackson Hole in August the USD continued its slide and then caught a bounce. The bounce appears to be purely technical.

That technical bounce though for the first time did pierce the trend line. Granted it recovered the next day and moved back up but it looks to be a true “dead cat” bounce. So here it is now ready to test the trend line again. Literally by the time I finish this post it may break through. Seems the only thing that can save the USD right now is either an end to QE, highly unlikely or some geopolitical risk that lasts beyond a day.

If the trend line breaks then there is some near term support for perhaps another bounce at 76, then 74 then 70. A true break though of this trend would be very bearish though. It’s rather concerning. I saw a report today that extrapolated the prices paid component to the ISM manufacturing data to CPI 12 months out. It forecasts 6.2% CPI. How do people on fixed incomes, people struggling to make ends meet right now budget for such an increase? How do companies manage margins for discretionary products where passing price along is almost impossible? In the words of Larry Kudlow, inflation is a tax on the consumer.

To get a sense of how traders are positioned the weekly CFTC COT report can be very useful.   Below are two charts comparing commercial net positions and non reporting net positions versus the USD.   The correlations are not very tight but I do think you can look at relative positions to get a sense of directional change.

Commercial net positions per the chart below are at prior maximum net long positions where they have reversed in the past.  Over the past seven months this chart has had an inverse correlation so a decrease in net long positions implies USD strength.   Again, it’s not very clear how to interpret this data other than to look at the relative net positions the past 14 months as charted below.

Non reporting net positions have moved very net short in a very brief period of time.  Knowing how the market likes to fade this group, it’s quite possible a USD reversal occurs  purely to squeeze these positions.  This group had been going more net long while the USD traded within a tight range and has been slow in getting net short as the USD has declined.

At some point, USD weakness will not be good for risk assets.  It already is not good for the American consumer. Makes manufacturing reports look pretty in the short term until margin compression further hits employment causing even weaker demand.

Only question is which direction?  Check out this narrowing wedge which has some more time to play out.  The bond market appears as confused as the equity markets.

The USD (per the DXY) is too looking set for a more immediate break out and based on the chart pattern, odds favor down but based on the COT report commercial traders may in fact be ready for an upward breakout. The red line below is a trend line that goes back to 2008 with four successful tests.

A great session on Friday in which our TMS system took 1256 points from our GBP.USD sell signals! Our members have been on the right side of the dollar’s upside moves and the falling knife aka recently as the ‘Euro’ has been shorted nicely by us.

Dow Four Hour Chart

In light of the recent Euro slide we would have liked the U.S. markets to have moved lower after all they have been in close synchronisation lately. The Four Hour chart shows what we’re currently watching. The story is simple – the 11,000 Dow mark is the line in the sand and if we get a four hour candle close below this number then expect the markets to slide a lot lower. We warned you all that the U.S. markets would slide soon, warned you all the dollar will start to rally when the others found it hard to express the words dollar and rally in the same sentence. We said the decline for the Euro would soon materialise and it did! 1200 points lower from the high printed at the start of THIS month!

We also stated how a Santa clause rally may not occur this year! So of course we might rally but mark our words 10000 before year end is not that much of a big move. TWO days of 200 point declines and we will be in the zone!!! Either way, simply look the blue line above. The Nasdaq100 was lagging at the open but now is firmly taking charge. If this stories continues and we are able to get a candle close below the blue line then expect a pure bloodbath.

Euro Four Hour Chart

We patiently waited with our TMS short signals and have caught over 2000 points in line with recent declines. It is totally Pertinent for us to say ‘we told you so’ because to put it simply – we did!

You’ve seen the charts where we got our sublime TMS sell signal at the top and now you can see the pace of the decline against the rise. We might be due a bounce but overextended action in these circumstances can get even more overextended! 12600 – 12800 is still probable and the falling knife could well take out 130 although the lower end of the declining channel meets at 130 so you could expect a psychological bounce at this area.

The U.S. markets haven’t fallen in line with the advance they shared with the Euro in September/October. Do be cautious as the Dow Jones can simply catch up within a few sessions and then you’ll see ugly patterns all over the place!

On the surface, sure, all looks well. To even talk about a double dip right now will get you banned from CNBC (which isn’t a bad thing for your credibility). Before people go ahead and call mortgage gate a non issue, bank health a non issue, macro economics as rebounding, check out the headline from October 5, 2007 (yes 2007).

Nonfarm payrolls rose by 110,000 last month — including 73,000 in the private sector — very close to expectations of a 113,000 gain in total payrolls.

The S&P 500 highs were on October 8, 2007. What happened after that? Subprime was NOT contained. Financials having declined for 5 months were a leading indicator of the indices. The economy was not doing a goldilocks dance as Kudlow so proudly declared each night. This is all in the back drop of a weakening dollar and rising commodity prices.  Seems quite familiar to our current environment.